from the that-free-market-appears-slightly-tilted-in-one-direction dept

When it comes to the nexus between competition and regulation, competition is all too often cursed with fair-weather friends. For today's example, we'll take a trip down the copyright regulation rabbit hole.

It begins with a Copyright Royalty Board (CRB) proceeding for setting webcaster rates under a statutory license in Section 114 of the Copyright Act. The process, called "Web IV" because it is the fourth such proceeding under this section of the Copyright Act,[1]was announced late last year and should conclude by the end of 2015. By mid-December, non-interactive webcasters like Pandora and iHeartMedia will know how much they must pay to stream (or "publicly perform") recorded music to listeners from 2016-2020.[2]

These statutory license rates, part of a complex multi-tiered system that, as we've noted in the past, legally requires discrimination against new technologies, are set for 5-year periods and are paid to an entity called SoundExchange. SoundExchange is designated to collect royalties under the statutory license for certain uses of sound recordings, including Internet radio play of music.

(Perhaps you're thinking, "wait, I thought radio stations didn't pay royalties to play records on the air?" You would be right: traditional terrestrial radio does not pay royalties for playing sound recordings – which has historically been defended with the argument that radio play provides valuable promotion for sound recording owners. But in another example of copyright law discriminating against new entrants, while conventional terrestrial radio is not compelled to pay for the public performance of sound recordings, Internet radio must pay to do the same, under Section 106(6) of the Copyright Act.)

The rate Internet radio services pay is supposed to represent what a "willing buyer" would pay a "willing seller." During the round of rate setting that governed 2006-2010, however, the CRB announced a fairly punitive "willing buyer/willing seller" rate, which was so high that it exceeded some webcasters' total revenues. The risk that the Internet radio industry would collapse led Congress to enact the 2008 and 2009 Webcaster Settlement Acts, under which most non-interactive music licensees directly negotiated settlements with SoundExchange for that time period. An important wrinkle to this legislative action, however, was that Congress also directed that these settlements could not be used as benchmarks for future rates – which includes the current rate setting proceeding.

So, why is this relevant? It matters because in the current Web IV rate setting proceeding, SoundExchange has argued that recent deals struck in the free market by non-interactive webcasters should not be used as the benchmarks for non-interactive rates.

Those deals include an arrangement between Pandora and the collection of indie labels known as Merlin. The terms of that deal were lower than the existing statutory rate, and encouraged Merlin music to be played more (and thereby the music of major labels to be played less). At the time, rights-holders openly criticized Merlin for entering in the deal, noting that it could become a benchmark, and might result in prices coming down. It was a peculiar moment: despite all the cheerleading of moving toward a free market in music licensing of willing buyers and willing sellers, Merlin came under fire for actually being a willing seller at the best price it thought it could get.

SoundExchange previous said it was seeking "rates that reflect a fair market value for recorded music… based heavily on evidence of other deals that exist in the marketplace". Now, however, it argues that an analogous free-market deal with Merlin should be ignored, because it was in some way influenced and thereby tainted by settlements reached 6-7 years ago.[3]

This situation illustrates an issue larger than webcaster rate setting: there is cognitive dissonance about what it means to have free-market transactions in lieu of statutory licenses. In parts of the music industry, there is hostility to the statutory licenses. While statutory (or "compulsory") licenses help overcome the enormous transaction costs of licensing millions of works from millions of rights-holders, they don't allow rightsholders to say "no" to all uses.[4] These statutory licenses, it is sometimes argued, are unfaithful to the notion of copyrights being property rights. Such transactions would be better handled in the free market, the argument goes, and so statutory licenses should be repealed.

Nevertheless, the free market enthusiasm disappears when a free-market deal was actually reached outside the statutory license. To the dismay of other licensors, Merlin's competitive price was *lower* than the statutory rate, and suddenly the free market doesn't look so hot. Hence, Merlin was criticized and now efforts are being made to expunge Merlin's deal from the record.

There are numerous transactions cost-related reasons why — absent better copyright ownership records — it is impossible to have a completely free market in music licensing at present. Still, insofar as anyone is going to champion competition as an alternative to statutory licenses, that means accepting prices that may be below statutory rates. If "free market" means rates can only be higher than statutory rates, then we don't have a free market; we have a price floor. Or, stated otherwise: we're not really talking about "willing buyers and willing sellers" if we're only going to entertain market-based deals that come in above the statutory rate.

[2] The CRB only sets rates for "non-interactive digital music services"; interactive services like Spotify, which are "interactive" because users can determine themselves which music is delivered, fall outside the statutory license.

[3] The rationale for this is that Congress directed in Section 114(f)(5)(C) that Webcaster Settlement Act (WSA) agreements shall not "be admissible as evidence or otherwise taken into account" in a rate settlement proceeding. Because SoundExchange contends the Merlin agreement resembles the 2008-09 settlements, considering the Merlin rate would be "taking into account" a WSA agreement.Instead, SoundExchange contends that the benchmarks for non-interactive rates should be deals between interactive services like Spotify. When all the relevant apples are inadmissible, we're left referring to oranges.

from the and-so-it-goes dept

Because the federal government apparently hasn't helped the RIAA enough in the past century -- despite repeatedly changing copyright laws to favor the industry again and again and again (and again) -- the Senate Judiciary Committee has approved the Performance Rights Act, which effectively serves to tax radio stations for promoting music. It's quite obvious to anyone who actually understands radio economics that this makes no sense. After all, the history of radio has always been about payola -- having the labels pay the radio stations to play certain works. That's because the record labels know quite well that airtime leads to more money in terms of promoting an artist and building a business model around music, concert and merchandise sales. To the labels, airplay has always been the equivalent of advertising. That's why they pay for it.

But now they want the radio stations to pay them to advertise the labels' music? Isn't that getting the equation backwards?

This is nothing more than a federal bailout of the RIAA, who still refuses to embrace new business models. Instead, they have to squeeze others and get the government to force them to hand over money. A real business model doesn't involve changing the law. It involves giving others a reason to buy. Apparently, that's too difficult for the RIAA.

As for the claims that a performance license will somehow help musicians, that's bogus as well. First, ask the RIAA's SoundExchange about all the money it keeps for itself and about all the musicians it "can't find." Besides, all this will do is harm up-and-coming musicians. Because radio stations will now need to pay more for playing music, they'll play less music, and if they're playing less music, they'll focus just on the big name acts. Smaller up-and-coming artists should be furious with the RIAA for giving radio stations less incentive to play their works. Remember, this is the opposite of payola. While payola got new records on the air, this will make sure fewer get on the air. But it will sure put a bunch more money in the pockets of the major record labels. So there's that.

from the can't-compete? dept

We mentioned back in July how Pandora was urging its users to support the Performance Rights Act, which is effectively a government bailout for the RIAA by taxing already struggling radio stations for the right to help promote the RIAA's music. It's a travesty. The only reason Pandora supports it is because Pandora was pressured into its own ridiculous webcasting rates and wants to help bring down radio too. While I like Pandora as a service, I think it's shameful that it's now using the political process to burden competitors with a government created tax, that goes straight to the RIAA.

Apparently, Pandora has once again ramped up this effort to have the government tax its competitors. A whole bunch of you have been forwarding these ridiculous emails from Pandora that urge people to contact their elected officials in support of the RIAA Bailout bill. Most of those submitting those emails to us have said that you'll be doing the exact opposite, and are offended that Pandora is pushing you to support such a thing.

Yes, Pandora, it sucks that you got stuck with ridiculous webcasting rates that will make it difficult to remain profitable, but that's no excuse for trying to get the government to dump an unfair tax on your competitors.

from the strange-bedfellows dept

Well, this is rather disappointing. Just days after caving in and agreeing to new webcaster rates that will harm pretty much everyone, Pandora has gotten right into bed with the RIAA/SoundExchange in supporting the Performance Right Act (the RIAA Bailout Act) to extend a similar unnecessary tax on radio. Pandora's reasoning is no surprise: basically it's saying that if it has to pay such a silly tax to help promote musicians, it's unfair that radio stations get away without paying something similar. But, still, it's disappointing. Rather than looking at adding value to the overall market, Pandora has basically decided that it's "enemy's enemy is a friend" and is supporting such a law simply because it will harm radio stations. This makes me think significantly less of Pandora.